Gold Juniors…..

Posted by Stewart Thompson -

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1. I have some very interesting information about the gold juniors today. Better have your heart medicine on standby.

2. Gold hit 1180 this morning. The dollar bulls continue their crazed focus on the intermediate trend, and at best their technical analysis gets a C rating. They called their pivot point correctly in timing the gold market. The only minor problem was they got the direction wrong. Gold top call number 1000 bites the dust. Only 1000 more top calls to go before they say “buy now, gold is a bargain at $5000, it’s here to stay!”

3. Flying Five. I had to give this a lot of thought and needed extra time. What I’m talking about is the GDX Juniors. How do you boost possible reward by concentrating some risk capital into some of the issues? (Ed Note: Emphasis Mine) There are some systems that exist to play the Dow that way. To repeat: You take the Dow 30 stocks, and there are a couple of approaches from there. One is to take the 10 highest yielding of the 30, then buy the 5 of those with the lowest price.

4. That is essentially how I bought Alcoa and General Electric into Dow 6500 while most of the gold community madly shorted the stock market into the exact bottom. Where the value players got smoked is they looked at the price/earnings ratio for the whole Dow, and concluded it was still overvalued at Dow 6500.

5. Alcoa controls a lot of the world’s aluminum markets. At a price of $10,9,8,7,6, 5 dollars a share, I want to be a buyer, particularly when I see the price/earnings ratio in the 6 or 8 area, while the MACD and TRIX indicators for the Dow are at arguably the most oversold conditions in 50 years. And so l was a buyer into the Dow 6500 bloodbath.

6. This week’s revelation by the banksters that bear market funds were “inundated” by retail investors all through 2009 is a knockout blow to those in gold community who shorted the Dow into 6500 and as it rallied with huge money. You now realize you did so in partnership with the public investor, who has the worst investment track record in the universe.

7. Junior gold stocks are not Dow Industrial component monster corporations deemed “too big to fail”. Many are more likely to be deemed “too small to be allowed to succeed.” There are many in the gold community who seriously believe that their junior stock is a stronger deal than the Dow is. A coming sure rise in the price of a stock does not correlate with the underlying risk of the situation.

8. Assuming you accept the endless risks associated with a junior play, I think buying just 5 juniors out of the GDXJ is really just far too risky a play. But if you want to proceed, the play would be to simply look at the 10 largest market cap/revenues plays, meaning either the 10 largest market cap stocks OR the ten with the smallest market cap to revenues ratios (but this eliminates explorers). Or price per share to revenues per share ratio. Forget about earnings with juniors. Then buy the 5 of those ten with the lowest price. If you get into mining projections, you are starting to get away from simplicity and into complexity. I firmly believe the simple-minded investor will beat the one who over-complicates things. If you did a thousand pages of analysis, but your stock is down 10% or more from your buy price, you are not acting professionally in the market. You must be prepared 100% of the time to respond to price weakness. The investor with the weaker analysis but the stronger tactics will win over the strong analysis, weak tactics player, nearly every time.

9. I’m personally not confident that there is enough safety in that flying 5 juniors play. I prefer a simply “J 10”, buying the top ten stocks with the lowest price. The 2nd approach would be to take the 20 with the highest market cap, and buy the 10 with the lowest price.

10. Remember, there is a monitoring issue. You may own a business or have other time-constraint factors. That is an argument to consider the simple price-based model. You simply own the 5 or 10 lowest-priced stocks and flip one out when a new one comes in.

….read points 11- 24 HERE